Rating Rationale Welspun Corp Ltd 7 July 2021

Brickwork Ratings reaffirms and places the ratings for the Non-Convertible Debentures Issues aggregating Rs. 590.00 Crores of Welspun Corp Ltd. on Credit Watch with Developing Implications.

Particulars Amt Rated Instrument Previous Raying Present Rating (Rs in Crores) Tenor (August 2020) Previous Present BWR AA (Credit Watch Long NCD 90.00 90.00 BWR AA (Stable) with Developing Term Implications) BWR AA (Credit Watch Long NCD 500.00 500.00 BWR AA (Stable) with Developing Term Implications) Total 590.00 590.00 Rupees Five Hundred and Ninety Crore Only *Please refer to BWR website www.brickworkratings.com/ for definition of the ratings

Rating Action / Outlook

BWR places the ratings for the Non-Convertible Debentures Issues aggregating Rs. 590.00 Crores of Welspun Corp Ltd. on Credit Watch with Developing Implications on the basis of the following announcement by the company. The management of Welspun Corp Ltd. (WCL) announced that the company proposes to acquire the division of the group company – Welspun Steel Ltd. (WSL)’s steel operating business which manufactures BIS-certified steel billets and direct reduced iron, specialty steel and thermo mechanical treatment bars and businesses directly or indirectly carried out through the investments held in Welspun Specialty Solutions Ltd. (WSSL), Anjar TMT Steel Private Limited and Welspun Captive Power Generation Limited. As on date WSL holds 50.03% stake in WSSL which is proposed to be transferred to WCL as per the scheme. WSSL will continue to be an independent listed entity as specified in the press release. Based on the information provided in the press release, the proposed scheme is expected to be completed by FY22 and is expected to be effective April 1, 2021 subject to regulatory and other approvals. Based on the information provided in the press release, the proposed scheme is expected to be completed by FY22 and is expected to be effective April 1, 2021 subject to regulatory and other approvals. WSL is a privately held company, situated in Welspun City, Anjar. In its Steel Division, it manufactures BIS Certified Steel Billets and Direct Reduced Iron (DRI), and is implementing a Greenfield project for manufacturing of TMT bars with the expected project cost is ~ Rs. 190cr and the project is expected to be completed by September 2022. Besides, as a part of its Steel

1 Division, WSL holds 50.03% shares in Welspun Specialty Solution Ltd. (WSSL) and it has provided Corporate Guarantee to the bank loans of WSSL rated by BWR.

Consideration: The transaction is a related-party transaction and the same is being done on an arm’s length basis post thorough due diligence as per WCL’s press release. Since the majority stakeholders in WSL are the same as WCL, the indirect acquisition of control of WSSL is exempt from open offer provisions under the Securities and Exchange Board of (Substantial acquisition of Shares and Takeovers) Regulations, 2011. The purchase consideration for WSL’s steel operating business including its investments held in WSSL, Anjar TMT Steel and Welspun Captive Power Generation will be paid in the form of cumulative redeemable preference shares (CRPS) amounting to Rs.362.73 Cr. The CRPS would not be listed on the stock exchanges and will be redeemable at the option of the holder, upon the expiry of 18 months from the date of issue.

Impact of Acquisition: BWR places the rating of the NCDs of BWR AA of WCL on Credit Watch with Developing Implications on account of diversification of business profile of the company with the addition of steel business, other aligned uncertainties and its impact on the cash flows of WCL. BWR will continue to closely monitor the developments and the progress of the transaction and will evaluate its impact on the business and financial profile of WCL once more clarity emerges.

RATING RATIONALE The rating continues to derive strength from WCL’s position being one of the largest welded pipes manufacturing company globally, strong presence in markets like US and Middle East, experienced promoters with vast experience of the company in the industry, healthy order book position reflecting good revenue visibility, adequate liquidity and comfortable capital structure and benefits of diversification with its entry into ductile pipe segment. The rating is however constrained by susceptibility of slowdown in end user industry, oil and gas and volatility in crude oil prices which is to some extent mitigated by uses of the company’s products for water and irrigation segment.

Description of Key Rating Drivers

Credit Strengths-: Group with strong Global Presence in Steel SAW Pipe market: WCL is the flagship company which belongs to the . WCL offers a complete pipe solution with a capability to manufacture line pipes ranging from 1⁄2 inch to 140 inches, along with specialized coating, double jointing and bending. With a current capacity of 2.425 million MTPA in Dahej, Anjar and Mandya in India, Little Rock in the USA and Dammam in Saudi Arabia, WCL is one of the preferred suppliers to most of the Fortune 100 Oil & Gas companies.

FY21 Performance: In spite of the lockdown during the initial months FY21 due to the pandemic, the company reported strong performance for Indian Operations during FY21 wherein revenue increased to Rs.4642 CR from Rs.4253 Cr in FY20 and EBITDA margin improved to

2 10.7% from 6.7% in FY20. US operations were impacted by uncertainty with regard to the Government as elections were concluded in November 2020 and severe impact of pandemic.

Order Book Position: The company has the order book of Rs.4800 Cr to be executed in the next one year with the active bids of 1230 KMT across geographies.

Healthy Capital Structure in relation to the debt: The company has tangible net worth of Rs.3739 Cr with outstanding fund based debt of Rs.771 Cr as on date, leading to the gearing of 0.2x. During FY21, the company raised NCDs of Rs.400 Cr to partly fund the capex requirement of Ductile Pipe business. As on date, there is Rs.100 Cr outstanding under the CP programmer of Rs.500 Cr.

Diversification with entry into ductile pipe segment: Capex Plan: The company plans to enter into Ductile Iron (DI) Pipe Segment. DI pipes are used for water supply infrastructure, sewage Pipe System, irrigation water system, etc. in urban and rural areas. Total capex required for the purpose is Rs.1600 Cr for the project of 400,000 MT. The capex is expected to be funded with the mix of debt and equity, proportion of which is yet to be decided by the management. The project is expected to be commissioned by March 2022.

Credit Risks-: Volatility in Crude Oil prices: The Company derives approximately 50 to 55% of the revenue from the oil and gas segment. Volatility in crude oil and very low gas prices create uncertainty for oil and gas producers, regarding viability of their new exploration. This in turn, could create an uncertain future demand for line pipes in the oil and gas segment. However, there has been announcements of large gas pipelines projects under the National Gas Grid Program in the domestic market by Government of India and City Gas distribution schemes which is favorable for Pipe manufacturing companies and Welspun is one of the beneficiaries of such announcement

Analytical Approach BWR has analyzed WCL on a consolidated basis taking into consideration its consolidated financial profile. To arrive at its ratings, BWR has applied its rating methodology as detailed in the Rating Criteria detailed below (hyperlinks provided at the end of this rationale).

LIQUIDITY (Strong): As on March 31, 2021, the company had cash and cash equivalent of Rs. 1391 Cr. Further, there is an unutilized Cash Credit limit of Rs.90 Cr along with unutilized Commercial Paper Programme of Rs 400 Cr as on date. Debt service obligations during FY22 is Rs.27 Cr. Cash accruals of the company are more than sufficient to service the debt obligations. Additionally, the company has received Rs.723.5 Cr out of the total purchase consideration of Rs.848.50 for transfer of the Plates and Coil Division (discontinued operations) to JSW Steel Ltd. The balance purchase consideration is expected to be received by next month. As of now, the proceeds are deployed in AAA rated Government securities. As such, the liquidity profile of the company is considered Strong.

3 KEY RATING SENSITIVITIES: Positive: Substantial improvement in revenue, profitability and debt servicing profile with takeover of the steel business from the group along with improvement in order book position with favorable mix will be credit positive. Negative: Decrease in revenue, profitability and order book with economic downturn coupled with increase in leverage after the takeover of the Steel business from the group will be credit negative.

About the Company Incorporated in 1995, Welspun Corp Ltd. (WCL) is the flagship company of the Welspun group which has an established track record in the fields such as line pipes and home textiles apart from presence in Steel, Infrastructure and Energy promoted by Mr B K Goenka. The company is engaged in manufacturing of HSAW, LSAW and ERW pipes. Its manufacturing plants are located at four locations in India (Dahej and Anjar in Gujarat, Bhopal in Madhya Pradesh and Mandya in Karnataka) with the production capacity of 1655 million tonnes per annum (MTPA). Further, the company through its 100% subsidiaries has set-up operations in US (Little Lock, Arkansas) and 50.01% subsidiary in Saudi Arabia, bringing its total pipe production capacity to 2555 MTPA. WCL produces LSAW, HSAW and ERW pipes ranging from ½ inch to 140 inches, along with specialized coating, double jointing and bending.

The company enjoys a dominant position amongst global large diameter welded pipe manufacturers and has gathered several accreditations from major oil and gas companies worldwide. It has demonstrated excellent capabilities in supply of line pipes for complex projects in the oil and gas and water segments.

The company’s client list in the oil and gas sector comprises – Shell, Saudi Aramco, TOTAL, Chevron, Energy Transfer, South Oil Company, Exxon Mobil, Kinder Morgan, TransCanada, Enbridge to name a few. WCL is listed in NSE and BSE. March 31, 2021 50.2% shares were held by the promoters, 12.7% by Foreign Institutional investors, balance by general public.

4 Company Financial Performance Standalone Consolidated

Rs. Cr FY20 FY21 FY20 FY21

Audited Audited Audited Audited

Total Operating Income 4253 4642 9957 6440

Reported EBITDA 389 496 1276 909

Net profit from continuing Operations 306 1009 692 642

Net Profit 268 1002 654 631

Total Debt 761 563 995 771

Tangible Net worth 1508 2514 3140 3739

Debt to Equity 0.5 0.2 0.3 0.2

Current Ratio 1.5 2.5 1.5 2.1

Status of non-cooperation with previous CRA (if applicable)-Reason and comments - NO

Rating History for the last three years (including withdrawn / suspended ratings)

Instrument S.No Current Rating (2021) /Facility Rating History

Type Amount August August August (Long Term/ Rating (₹ Crs) 2020 2019 2018 Short Term)

AA (Credit Watch AA- AA- 1. NCD Long Term 90 AA(Stable) with Developing (Stable) (Stable) Implications) 2. NCD Long Term 500 AA(Stable)

Total 590 Rupees Five Hundred and Ninety Crore Only

COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple For more information, visit www.brickworkratings.com/download/ComplexityLevels.pdf

5 Hyperlink/Reference to applicable Criteria ● General Criteria ● Approach to Financial Ratios ● Manufacturing Sector ● Criteria for Consolidation of Companies

Analytical Contacts

Bal Krishna Piparaiya Forum R Parekh Senior Director - Ratings Manager - Ratings B :+91 22 2831 1426, +91 22 2831 1439 D : +91 22 6745 6621 B :+91 22 2831 1426, +91 22 2831 1439 [email protected] [email protected]

1-860-425-2742 [email protected]

Annexure I KEY COVENANTS OF THE RATED NCD: Instruments Amt (Rs. Cr) Issue Date Coupon Tenure ISIN

NCD 90 9-Nov-12 11% (payable semi-annually) 10 years INE191B07139 NCD 200 10-Feb-21 6.50% (Payable annually) 3 years INE191B07154 NCD 200 16-Feb-21 7.25% (Payable annually) 5 years INE191B07162

Annexure II – Entities Consolidated Name of the Entity Stake (%)

Direct Subsidiaries

1 Welspun Pipes Ltd. 100%

2 Welspun Trading Ltd. 100%

3 Welspun Mauritius Holdings Ltd. 89.98%

Indirect Subsidiaries

1 Welspun Tubular LLC 100%

2 Welspun Global Trade LLC 100%

Joint Venture

1 Welspun Middle East Pipes LLC 50.01%

2 Welspun Wasco Coatings Pvt. Ltd. 51%

3 Welspun Middle East Pipes Coating Company LLC 50.01%

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